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Economic Growth For Development DEV7007-B........
Economic Growth For Development DEV7007-B........
Economic Growth For Development DEV7007-B........
FOR DEVELOPMENT
DEV7007-B
Table of Contents
Introduction:...............................................................................................................................................1
Economic Growth and Openness to Trade:..............................................................................................2
Openness to Trade:.................................................................................................................................2
Theoretical Framework:............................................................................................................................3
New Trade Theory:.................................................................................................................................4
Variables to control:...................................................................................................................................5
Growth of Population:............................................................................................................................5
Investment:..............................................................................................................................................5
Inflation and Domestic credit:...............................................................................................................5
Industry:..................................................................................................................................................5
Conclusion:..................................................................................................................................................5
To what extent trade openness has the potential to stimulate
growth in developing countries? Critically examine using a
Theoretical framework and relevant data.
Introduction:
The modern tendency of reducing obstacles to the unrestricted movement of products, services,
labour data, capital, and ideas across international borders is known as trade openness. The long-
term objective is for social and monetary systems around the world to become more intertwined.
Both economic growth and technological advancement have benefited from international trade in
goods and services. The global economy can now profit from greater trade openness to the
widespread adoption and use of modern technology. As communication and transportation
technology have improved, new global markets for the exchange of commodities and services
appeared. The host country's economy benefits from foreign direct investment (FDI) in a number
of ways, including increased productivity, a new understanding of what it means for an economy
to be efficient, and the fostering of international relations (Arrow, 2019).
Over the past 50 years, academics and decision-makers have studied the connection between
greater trade openness and higher living standards. Although there is a growing need of research
on the topic, the conclusions have not yet been able to conclusively establish the nature of the
series' link. Two schools of thought—growth-led trade and trade-led growth theories—have
emerged in the literature to help us make sense of these relationships. Most academics concur that
greater trade flows contribute to economic growth. Through commerce, partners can profit from
one another's companies and add to the overall economy (Grossman, 2020).
Trade liberalisation and economic growth are topics covered in a lot of literature. it is not
accurate to say that more commerce raises GDP. Few issues in the evolution of economic theory
have generated as much spirited discussion as this one. We utilize data from the World Databank
to examine 71 developing nations in order to understand how trade openness affects economic
growth. In recent decades, many emerging nations have started their programs for external
economic liberalization, setting an excellent example for other nations (Hallak, 2021).
Additionally, prior research has shown that trade relations serve as informational bridges,
facilitating the transfer of technological know-how and innovative concepts. Emerging nations
may have a lot to gain by establishing trade ties with advanced, economically integrated nations.
The relational mechanisms that influence trade returns, in contrast, are highlighted in other
literature that employs structure-based models. Underdeveloped countries that are less connected
to the global trade system have a disadvantage when sending and/or receiving goods, whereas
countries with considerable connections have more negotiating leverage in international
commodity exchanges (Harrison, 2018).
Openness to Trade:
It is amazing how many perspectives exist on South Korea's economy—some perceive it as open
and outward-looking, while others see it as heavily regulated and semi-closed. For a very long
time, economists have struggled to come up with reliable and palatable ways to assess trade
openness between nations. We are aware that openness is a complex idea in order to study
measurement. While some studies rely on readily available openness metrics, others have created
indices to evaluate variables like a country's export and import levels (Mankiw, et al., 2017).
There have been hundreds of studies on the topic, and each one has used a different metric to
determine trade openness. The second set of data examines the degree to which nations impose
trade barriers among themselves and includes measures such as average tariff rates, export taxes,
taxes on international trade, and non-tariff barrier indices (NTBs). Tariffs are a straightforward
indicator of trade limitations since they compare tariff receipts to import values. On the other
hand, the effect of tariffs on growth remains a contentious issue. Nearly all of these indicators are
largely disregarded in the empirical literature due to a lack of sufficient data and the prevalence of
measurement mistakes (Pritchett, 2018).
Along with the customary units of measurement, there is also the exchange rate. In this industry,
it is common practise to gauge the severity of trade prohibitions using the black market premium.
Despite this, the black market premium is considered to be a reasonable proxy for the overall
degree of external sector distortions rather than a measure of trade policy due to its significant
link with a number of undesirable policies such as high inflation or a high degree of corruption.
Finally, a variety of trade-oriented policies have been devised to investigate how openness affects
development. A country is considered closed if it meets any of the following five criteria: average
tariff rates of 40% or more, NTBs covering 40% or more, a socialist economy, a black-market
exchange rate depreciated by 20% or more relative to the official exchange rate on average, and a
state monopoly on major exports. This index is not frequently used due to its limited breadth.
Without assessing the volume of global commerce, it just categorizes countries as being either
fully open to trade or completely closed (Pritchett, 2018).
Theoretical Framework:
The developing nations of the world have made amazing progress in recent decades. In Asia and
Latin America, millions of people have been lifted out of terrible poverty, while numerous
entrepreneurs have amassed enormous fortunes and established businesses that have changed the
game. Free trade, many economists believe, was and continues to be a significant role, despite the
fact that it is impossible to identify a single element that caused this expansion (Pritchett, 2018).
The possible gains and disadvantages of trade for economies have been addressed by the theory
of global trade. Regulating how commerce affects development is still mostly unregulated.
Technology advancement is the primary long-term driver of economic growth, according to
conventional growth theories. By investing their domestic savings, economically isolated nations
may integrate into the world economy. Because of this, rapid progress forces people to make
short-term financial sacrifices in order to increase their long-term prosperity. Contrarily, trade can
lead to capital inflows and knowledge spillovers, both of which help an economy become more
technologically advanced (Mankiw, et al., 2017).
When compared to earlier theories, the new trade theory has made a number of conclusions about
this matter, including that global trade fosters economic expansion and technological
advancement, and that this encouragement is brought on by elements like economies of scale,
comparative advantage, and knowledge spillover. Due to the increased allocation efficiency made
possible by global trade, which raises the entire production potential frontier, comparative
advantage arises. Long-term economic gains will accrue to every nation. We will use the
Heckscher-Ohlin model to construct a more plausible representation (Rodrik, 2020).
Variables to control:
Growth of Population:
Economic theory does not provide clear guidelines for policymakers on how to promote
economic growth in the face of an increasing population. While proponents of the endogenous
growth hypothesis claim that more population results in greater technical advances, the
conventional economic theory asserts that a population that is expanding quickly may have a
negative effect on GDP per capita. This suggests that a growing population could either help or
hurt the economy (Young, 2017).
Investment:
Domestic investments have the potential to increase overall economic productivity by enhancing
both the quality and quantity of the human capital in the economy, hence they were included in
the investments variable in this research. It is anticipated that growth and investment would have
a favorable, statistically significant relationship (Acemoglu, 2018).
Industry:
To evaluate developing nations' technological prowess and level of industrialization, look at their
"industrial share" of GDP. Industrial value-added serves as an economic development accelerator
when combined with factors related to international trade (Yanikkaya, 2021).
Conclusion:
Over the past 20 years, developing countries have received several policy proposals, many of
which have included trade liberalisation. The most significant benefit of greater trade openness is
claimed to be economic growth since it encourages effective resource allocation, raises
competitiveness in domestic and global markets, and permits the transfer of knowledge and
technology across nations. There is also proof that openness and economic progress do not always
go hand in hand. We found the opposite to be true for emerging nations in Sub-Saharan Africa,
despite the fact that the positive openness-growth nexus has been shown to be true for many
developing nations, including those in East Asia and Latin America. As a result, I think that a
variety of factors, including location, level of development, macroeconomic stability, and the
sturdiness of the financial sector and domestic institutions, which account for the suggested
heterogeneity across countries, determine the impact of trade liberalisation on economic growth.
To sum up, I found it quite difficult to discover a method that is widely accepted for measuring
the openness of international trade, as well as a deeper grasp of what openness involves, during
my research. Both of these topics have sparked a lot of debate. There is an urgent need for more
study to create a standard statistic that can incorporate and enhance the numerous existing
approaches for measuring trade openness because there are so many of them now in use. I think
utilising trade shares of GDP as the main variable in my research is one of the better possibilities
for measuring trade openness because trade outcomes are more simply defined, measured, and
available via objective data sources.
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